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Economy is flying, but aviation is still dragging

Flying is not for the rich alone. It is every Indian’s right to be able to fly – to work, for holiday, even just for fun. For this, flying needs to be made more affordable than it is today.
By Ajay Singh | None
UPDATED ON FEB 18, 2008 09:28 PM IST

Flying is not for the rich alone. It is every Indian’s right to be able to fly – to work, for holiday, even just for fun. For this, flying needs to be made more affordable than it is today.

Low cost airlines have ensured that many more Indians fly than ever before. Yet, we have a long way to go. The number of trips has gone up from 18 million in 2005-06 to a projected 43 million in 2007-08.

On an average, a person who flies makes three trips a year and that means just about 1 out of every 100 Indians flies today.

The biggest bottleneck in ensuring lower fares is the price of aviation turbine fuel (ATF). Nearly 50 per cent of the cost of low cost airlines is what we pay for ATF.

The cost of ATF has nearly doubled in the last 2 years. A major component of the price is the tax that airlines pay to the Central and State governments.

Tax on ATF can be in excess of 50 per cent in some states. Worse, ATF in India is 70-80 per cent costlier than many other countries.

Traditionally, taxes in India have been high because flying has been treated as a luxury good. So just as colour television and computers were taxed in our socialist past, aviation is taxed today.

So, to make flying more affordable the biggest thing that Finance Minister P Chidambaram can do today is to reduce the taxes and duties on ATF.

I suggest ATF be granted the so-called “declared goods” status, which will make the fuel draw uniform sales tax of 4 per cent across all states. The minister can also reduce customs and excise duties on ATF to 5 per cent and 4 percent respectively.

Airlines also pay a tax on landing (a service tax of 12.24 per cent on landing, airport and air navigation fees), a tax on renting planes (the withholding tax on lease rentals), a tax on providing food or accommodation to passengers (the fringe benefit tax), and a tax on providing hotel accommodations to pilots and cabin crew (again, the fringe benefit tax).

Much of these are passed on to the consumers. There is a strong case for reviewing some of these taxes. Similarly, expenses on crew such as hotel accommodation cannot be considered as “fringe benefit” as crew do not gain any personal benefit out of this. Airlines cannot run the aircraft without crew and expenses on hotel for crew is a major part of such crew expenditure incurred by any airline.

All these taxes apart from making fares unaffordable, are putting great financial strain on airlines.

In a booming economy when practically all sectors are doing well, airlines continue to lose money.

As a consequence airline industry has limited resources to invest in its future – in enhancing passenger servicing; in revamping fleet and facilities; in retaining its employees; and also in expanding air connectivity in India.

With all airlines losing money, significant investment will be required by the sector if it is to grow. Some of this capital can come through FDI, if the norms on such investments can be relaxed.

Finally, our airports and the chaos they face. There is little doubt that significant investment is required to create infrastructure at existing airports and build new airports. The government has taken positive steps by privatizing the Delhi and Mumbai airports and permitting the private development of new airports at Hyderabad and Bangalore.

However, much larger investments are required by the government and the private sector, especially in smaller towns and cities.

(Ajay Singh is the Director, Spice Jet)

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